Criminal Case: When and Where Did The LIBOR Corruption Officially Come To Light? 2007, New York

London, UK - 15th July 2012, 16:10 GMT

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The US Department of Justice (DoJ) is preparing a criminal case against major banks and individuals over the manipulation of the London Inter Bank Offered Rate or LIBOR whilst private US and European investors prepare law suits. Collectively, the penalties and damages for civil and criminal actions could cost the banking industry anywhere between tens of billions to hundreds of billions of dollars according to different studies conducted by reputable sources. The New York Federal Reserve learned about concerns over the integrity of LIBOR in the summer of 2007, when a Barclays employee emailed one of their officials. Barclays wrote in a September 2007 report referring to multiple LIBOR corruptions, “Our feeling is that LIBORs (sic) are again becoming rather unrealistic and do not reflect the true cost of borrowing.” By April 2008, the New York Fed had further evidence as the global financial crisis was getting much more chaotic and the investment bank Bear Stearns had come close to collapse. At the time, a Barclays employee told a New York Fed official that “we know that we’re not posting... an honest” rate. He suggested that other big banks made similar bogus reports, saying that the British institution wanted to “fit in with the rest of the crowd.” He also mentioned, “where I would be able to borrow” in the LIBOR market, “without question it would be higher than the rate that I’m actually putting in.” As a result, NY Fed officials wrote in a weekly internal memo, "Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs to limit the potential for speculation about the institutions’ liquidity problems." After the April 2008 conversation, the New York Fed swiftly started notifying other American regulators, including the US Treasury Department.

Swimming with Glowing Sharks

Contradiction

Senior British regulators and key Barclays executives at the highest level have stated to the UK Parliament's Treasury Select Committee in recent weeks that they did not have explicit proof of LIBOR manipulation and associated wrongdoings by any bank including Barclays until much more recently. But the NY Fed’s documents, which were released at the request of Congressmen in Washington, DC, appear to undermine those claims.

LIBOR scandal migrates across the Atlantic

US Treasury Secretary Timothy Geithner has also been drawn into the LIBOR scandal. While president of the Federal Reserve Bank of New York from 2003 to 2008 he wrote via email to the governor of the Bank of England, Sir Mervyn King, amongst others, to reform LIBOR in June 2008. He appears to have reached out to the Deputy Governor, Paul Tucker, of the BoE as well. Geithner made six recommendations including eliminating incentives that could encourage banks to manipulate the rate and to establish a "credible reporting procedure." The email also stated that measures were needed "to prevent accidental or deliberate misreporting."

Bank of England (BoE) Response

Sir Mervyn passed on the Geithner recommendations via email to the British Bankers’ Association (BBA) , according to documents released by the BoE this Friday. Mr Tucker also arranged to talk to William C Dudley, the current president of the Federal Reserve Bank of New York, who was then executive vice president of the regulator’s markets group. "Both the Bank and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult," the BoE has now stated.

British Banker's Association (BBA) Response

Angela Knight, the chief executive of the British Bankers’ Association, who is stepping down at the end of the summer, said the suggestions from United States authorities would be included in a review of LIBOR. BBA published its initial findings within days of receiving Geithner’s recommendations via Sir Mervyn. While some tweaks have been made to how LIBOR is set, the more dramatic reform suggestions have never been implemented.

Geithner Defence

Whilst Geithner appears to have raised concerns about LIBOR in 2008, the NY Fed did not manage to stop the problems. Geithner, in his defence, could argue that his hands were somewhat full in 2008. For example, the US investment bank Bear Stearns nearly collapsed just weeks before Geithner had a meeting on April 28th, 2008, titled “Fixing LIBOR,” according to his schedule. As the regulators sought more information about the rate-setting process, they were consumed with trying to save the global financial system. In September 2008, US investment bank Lehman Brothers collapsed.

NY Fed Defence

The New York Fed has defended its actions in a statement: “Following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how LIBOR submissions were being conducted... we subsequently shared analysis and suggestions for reform of LIBOR.”

Early 2008: LIBOR manipulation in the press

Officials at the Commodity Futures Trading Commission (CFTC) first began looking into the LIBOR rigging issue after the Wall Street Journal and the Financial Times ran stories in early 2008 raising questions about whether there was market manipulation of this key banking index. The CFTC approached the Department of Justice. The Financial Services Authority (FSA) in the UK joined in later that year. In coming weeks, both the Federal Reserve chairman Ben Bernanke and Treasury Secretary Tim Geithner will inevitably discuss the LIBOR manipulation in detail when they appear before the US Congress to answer questions.

US Congress to investigate LIBOR manipulation

Key Democratic senators are calling on the US Department of Justice to hold bankers and regulators accountable who failed to “stop wrongdoing that they knew, or should have known about.” Twelve Democratic senators have now called for a full US investigation into any role banks and regulators may have played in the scandal over LIBOR, which helps set the standard for $650 trillion worth of corporate loans, credit cards, mortgages and other derivatives around the world according to estimates compiled by the ATCA Research & Analysis Wing.

Conclusion

As the LIBOR investigations on both sides of the Atlantic progress, do they solve or seed the next banking crisis? Could the LIBOR scandal become the catalyst for the next banking crisis? Given the scope of the LIBOR problems and the number of institutions involved, the rate-rigging investigations, civil and criminal cases could provide a signature moment to hold big banks accountable for their activities leading up to and during the global financial crisis. What are the consequences? Far from benign!

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